The role of board evaluations in strategic growth
|Services:||Corporate & Commercial|
|Industry Focus:||Financial Services, Insurance, Life Sciences & Healthcare, Real Estate & Construction|
|Date:||24 July 2017|
|Author:||Lis Boyce, Partner|
What you need to know
- The members of an organisation’s board have individual and collective responsibility for the overall governance and guidance of that organisation.
- While it’s easy to get caught up in the day to day, it’s important for boards to periodically step back and evaluate how well (or not so well) they are meeting their responsibilities, supporting the organisation’s strategy and achieving both short-term and long-term goals.
- A well-designed board evaluation based around key strategic questions, and possible involvement of an external evaluator, can play a critical role in ensuring continued growth and success for any organisation.
The concept of ‘board evaluation’ covers everything from a director having a quiet chat with the Chairman to detailed questionnaires and interviews with an external facilitator. Some boards and directors shy away from it, or only undertake it at a surface level. But when handled in the right way, board evaluation is an important piece of ‘kit’ in an organisation’s strategic tool bag.
Why conduct a board evaluation?
Support the organisation’s strategy
Any organisation can accept its current operations and strategy as 'what we’ve always done' without questioning whether that will lead to success and growth. As an organisation evolves, its governing body needs to revisit the question of whether its structure and governance are supporting the organisation’s development. For example:
- A growing company engaging with external investors for the first time will need to grapple with the difference between executive and non-executive directors, and accept more formal governance structures, such as board committees, required by a venture capital or private equity investor.
- Boards of recently listed companies need to adjust to a much broader range of stakeholders, additional requirements for shareholder approval and the need to engage regularly with the market through continuous disclosure.
- Recently listed companies may also need to work through legacy issues where the founder maintains a board position and significant shareholding. This may be a strength (there is a committed substantial shareholder with 'skin in the game' who is highly motivated to ensure the company succeeds in the long term) or a weakness (the founder cannot adjust to being outside the core of the executive team, and undermines the new CEO).
- Boards of companies in international groups may find that their area of responsibility is not clearly mapped out because the international group operates on business unit or functional lines rather than by entity, and those lines of authority may change over time. The local board may have an advisory rather than strategy-setting role but they are also on the front line when something goes wrong in the local business.
- Not-for-profit boards may grapple with strong personalities championing the interests of their constituents rather than those of the organisation as a whole, particularly when merging with a similar organisation, or trying to raise its profile and funding base.
In any transition, a wise board will consider:
- have we got the right board for this point in our journey?
- how are we building up the capability we will need for the next stages in our organisation’s evolution?
Promote good governance
Regular board evaluation is part of the framework of good governance. Reduced to its essentials, good governance means good stewardship and good decision-making.
Boards are stewards of the resources of the company, whether it is a business enterprise that needs to deliver capital growth and revenue to its investors, or a 'profit for purpose' organisation that needs to satisfy its community, charity or other objectives. Board evaluation can include these key questions:
- how well do we understand and communicate our strategy?
- who are our stakeholders and how are we engaging with them?
Boards exercise their stewardship through the decisions they make. In evaluating the way they do this, board members need to ask:
- do our decision-making processes get the best from each director? Is each director giving their best to those processes?
- do our processes have the right balance of strategy versus operations, short versus long-term focus and detail versus overview?
Deliver on legal obligations
The Corporations Act 2001 (Cth) does not impose any duty on boards as a whole – the duties fall on the individual directors who make up those boards. Those duties include the duty to act with appropriate care and skill (s 180) and the duty to act in good faith in the interests of the company (s 181).
Directors’ powers are exercised collectively. A board evaluation allows individual directors to consider whether they and their colleagues are personally applying appropriate skill and care to their decision-making for the benefit of the company. An evaluation also allows the board to consider whether its processes provide enough support to the individual directors to satisfy those duties of care, skill and good faith. For example:
- how does information flow to the board? (e.g. what is the quality of board papers and what is the timeliness of their delivery? How is information presented so that directors can easily monitor performance against key metrics?)
- how is communication managed at and between board meetings?
- how well do the board and senior management interact, and does everyone have a clear role?
- given that the Chairman’s role is to facilitate discussion, does his or her facilitation style ensure that all relevant views are properly aired? Does he or she draw discussion to a clear conclusion, and ensure that time is not being wasted?
- what are the particular skills and perspectives that individual directors bring to the board, and are they actually delivering value in contributing those skills and perspectives and in their interactions with each other?
What’s involved in the board evaluation process?
The starting point is looking at the board’s own charter (if it has one) and assessing whether the board has actually lived up to its stated responsibilities. From there, two steps should follow.
Ask key questions
As well as the questions outlined elsewhere in this summary, boards should consider:
- does the board give sufficient attention to long-term strategy?
- how effectively has the board monitored the executive team, the performance of the company’s business and the operation of the company’s risk management systems?
- what steps is the board taking to support diversity in the company’s leadership team and employees and are the diversity objectives being met?
- how effective were board meetings? (e.g. time allocated for particular topics, Chairman’s leadership, quality of board papers, participation of management, location and timing of meetings)
- are board committees fulfilling the objectives set out in the relevant charter, and what, if any, action items arise from the reviews undertaken by those committees?
Often the Chairman will take the lead on board evaluations. If he or she meets with individual directors to discuss their individual performance and contribution to the board, topics for discussion would include:
- changes in degree of independence including any potential conflicts of interest
- areas in which the director currently adds value, or could add further value, to the board's deliberations
- interactions with colleagues, senior management and shareholders.
Consider involving external expertise
When directors are evaluating each other, they may be tempted to be ‘soft’ given that our natural inclination is not to criticise people to their face, and personal relationships may be at stake.
A hand-picked external adviser brings the benefit of a fresh pair of eyes who may probe more deeply than a long-standing colleague. An external party may also provide value in conducting one-on-one conversations with board members and key managers and then collating the information on a non-attributable basis, in order to describe to the board as a whole, and to individual directors, the key issues that have emerged from those conversations.
It is not necessary to always involve an external party, but boards may choose to alternate 'internal' review processes with externally-facilitated processes on a year-to-year basis.
The board of any organisation has an essential role in 'setting the tone' from the top. Undertaking a board review demonstrates a commitment to continuous improvement, which the board would want to see reflected in the rest of the organisation.
If well designed, and positioned within an ongoing conversation about the organisation’s strategy and performance, the review process ensures that the board regularly takes a fresh look at:
- how the board is performing
- how the individuals are working together
- whether legal obligations are being complied with, and
- whether the directors (individually and as a whole) are serving the current and future needs of the organisation.
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